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Furlough scheme and moral hazard

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scotview
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Furlough scheme and moral hazard

#330029

Postby scotview » July 31st, 2020, 6:16 pm

There now seems to be two distinct camps re the furlough scheme (inc loans, grants etc).

One tack is that it has been useful and should be wound down to save the economy. The other thought is that it should be extended to retain jobs.

My feeling is that we will very soon witness moral hazard if these schemes are extended.

Furthermore, are these schemes really saving jobs? I feel that we are simply putting off a day of reckoning at great expense to the majority of the population.

Your comments would be greatly appreciated.

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Re: Furlough scheme and moral hazard

#330037

Postby Lootman » July 31st, 2020, 6:46 pm

A compromise solution could be to extend the payments, but make them a loan rather than an outright gift.

The loan would then be repaid to the government, over say 5 years, with the payments taken via PAYE or deducted from benefits.

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Re: Furlough scheme and moral hazard

#330054

Postby Dod101 » July 31st, 2020, 8:06 pm

Nope. They have to be wound down asap. They have done what was required, but reality has got to take over and if that means loss of jobs so be it. The furlough scheme was surely meant to be a bridge and once that is crossed reality must set in.

Unless of course you are of the persuasion of some, who seem to think that there is a magic money tree.

Dod

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Re: Furlough scheme and moral hazard

#330057

Postby Snorvey » July 31st, 2020, 8:25 pm


Unless of course you are of the persuasion of some, who seem to think that there is a magic money tree.


Well there almost is, what with the 10 year gilt at a tenth of 1% and many other governments looking at negative rates. No one is there to punish excessive borrowing unless they want to take on the Government.

.....and I guess there's also the fact that everyone is doing it, so its alright then.

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Re: Furlough scheme and moral hazard

#330058

Postby johnhemming » July 31st, 2020, 8:30 pm

The initial theory was a V shape recovery. It is not I think now the theory. Hence if some businesses need to restructure that needs supporting and mechanisms need to exist to get people back into work.

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Re: Furlough scheme and moral hazard

#330059

Postby Lootman » July 31st, 2020, 8:32 pm

Snorvey wrote:Unless of course you are of the persuasion of some, who seem to think that there is a magic money tree.
Well there almost is, what with the 10 year gilt at a tenth of 1% and many other governments looking at negative rates. No one is there to punish excessive borrowing unless they want to take on the Government.

.....and I guess there's also the fact that everyone is doing it, so its alright then.

Another, perhaps more cynical, viewpoint is that politicians are always going to borrow and spend as much as they can get away with. And at least this way it goes back to the people and taxpayers, rather than be squandered on some vanity project or ideological excess.

There are worse things than a government being too broke to tinker and meddle.

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Re: Furlough scheme and moral hazard

#330284

Postby gryffron » August 1st, 2020, 11:08 pm

Some people beleive the govt should subsidise ALL employment. We saw in the 60s/70s what a total disaster that was for the economy. With endless failed nationalised industries being subsidised, producing useless products no one wanted, at massive cost to taxpayers.

I think furlough was useful in the short term, but HAS to be wound down fairly quickly. Before we start subsidising jobs that have no future under any foreseeable circumstances.

But I do think govt purchasing decisions in the future should take more account of the economic recycling effects of the purchases. Benefitting uk suppliers even if their products are a bit more expensive than imports. Though I acccept this is even harder to do without corruption/waste than just looking at price.

Gryff

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Re: Furlough scheme and moral hazard

#330286

Postby Mike4 » August 1st, 2020, 11:19 pm

Now would be a good time to have a shake out, cancel the over-complicated benefits system and introduce universal income for everyone.

No need for furlough then, rely on your universal income. And find work that actually needs doing if you want more than that.

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Re: Furlough scheme and moral hazard

#330357

Postby Lootman » August 2nd, 2020, 4:16 pm

Mike4 wrote:Now would be a good time to have a shake out, cancel the over-complicated benefits system and introduce universal income for everyone.

No need for furlough then, rely on your universal income. And find work that actually needs doing if you want more than that.

Isn't this "universal income" thing just a permanent furlough scheme?

I feel very uneasy about the idea of paying people to do nothing, and making never working a viable lifestyle option. It also strikes me as extremely expensive to pay a living "wage" to everyone with a pulse including, presumably, anyone who has just arrived here. And how many more would arrive here if there was free money available (more than there already is from welfare)?

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Re: Furlough scheme and moral hazard

#330363

Postby Mike4 » August 2nd, 2020, 4:58 pm

Lootman wrote:
Mike4 wrote:Now would be a good time to have a shake out, cancel the over-complicated benefits system and introduce universal income for everyone.

No need for furlough then, rely on your universal income. And find work that actually needs doing if you want more than that.

Isn't this "universal income" thing just a permanent furlough scheme?

I feel very uneasy about the idea of paying people to do nothing, and making never working a viable lifestyle option. It also strikes me as extremely expensive to pay a living "wage" to everyone with a pulse including, presumably, anyone who has just arrived here. And how many more would arrive here if there was free money available (more than there already is from welfare)?

I'm not sure of my ground here, but I think those who know the subject say the cost of paying everyone a flat rate of something like £1000 a month instead of administering our current fiendishly complex benefits system and handing free money only to those who qualify, would be approx the same as the current benefits bill.

Maybe the better informed in here could put me right...

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Re: Furlough scheme and moral hazard

#330368

Postby NeilW » August 2nd, 2020, 5:19 pm

scotview wrote:There now seems to be two distinct camps re the furlough scheme (inc loans, grants etc).

One tack is that it has been useful and should be wound down to save the economy. The other thought is that it should be extended to retain jobs.

My feeling is that we will very soon witness moral hazard if these schemes are extended.

Furthermore, are these schemes really saving jobs? I feel that we are simply putting off a day of reckoning at great expense to the majority of the population.

Your comments would be greatly appreciated.


You shouldn't be "saving jobs" in a capitalist economy. The whole point is to let those that can survive, survive and those that can't fail and release their resources for use by better firms. "What about the jobs" is the clarion call of those wanting government bungs. Along with tax credits its the reason we have such poor productivity in this country. There are too many dead jobs in the private sector.

The appropriate approach for the Furlough scheme now is to change it into a Default Payroll paid directly by the Bank of England. QE for time if you like. With a wage set at the living wage.

Those then on the default payroll end up on the "volunteer list" which can be called upon by local government/community groups as they see fit to do what is needed. Everybody else is required to isolate at home.

Once you do that you have a powerful automatic stabiliser that works both temporally and spatially across the nation - injecting demand where it is required and backing it off where firms are recovering faster.

Once you have a catch all in place, firms can let people go as required. And will then have to compete for labour on the upswing - which drives forward both wages and automation (and therefore productivity).

There is a very good opportunity here to turn this into something that will keep demand up for business across the nation, while allowing business to right size without feeling guilty about their former staff.

NeilW

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Re: Furlough scheme and moral hazard

#330370

Postby NeilW » August 2nd, 2020, 5:22 pm

Snorvey wrote:Well there almost is,


There is. It's called the National Loans Fund and the Ways and Means Account - both of which are essentially overdrafts at the Bank of England (one intra day, the other inter day).

The BoE could charge 30% on the loan. It doesn't matter since the Bank is owned outright by HM Treasury and it receives the dividend.

There you go, government paying a nice high interest rate on borrowing. Should keep people who don't understand banking happy. :D

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Re: Furlough scheme and moral hazard

#330372

Postby NeilW » August 2nd, 2020, 5:27 pm

Mike4 wrote:the cost of paying everyone a flat rate of something like £1000 a month


Yeah, it is a silly idea, and it doesn't cost in. You'd require massive tax hikes and those tax hikes would have to be super variable to balance the cycle and like National Insurance they'd have to be at the low end (ie regressive) since you need to free up goods and services as there is no extra production from the idle labour.

You don't need to do that. Just offer everybody a job if they haven't got one and pay them a wage for their hours. Then you only have to pay those who aren't registered on any other PAYE system. That can be done practically automatically as a function of the data collected by the existing PAYE scheme (with a few alterations - like requiring the self-employed to put their drawings through PAYE and eliminating class 2 and class 4).
Last edited by NeilW on August 2nd, 2020, 5:29 pm, edited 1 time in total.

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Re: Furlough scheme and moral hazard

#330373

Postby Lootman » August 2nd, 2020, 5:28 pm

Mike4 wrote:
Lootman wrote:
Mike4 wrote:Now would be a good time to have a shake out, cancel the over-complicated benefits system and introduce universal income for everyone.

No need for furlough then, rely on your universal income. And find work that actually needs doing if you want more than that.

Isn't this "universal income" thing just a permanent furlough scheme?

I feel very uneasy about the idea of paying people to do nothing, and making never working a viable lifestyle option. It also strikes me as extremely expensive to pay a living "wage" to everyone with a pulse including, presumably, anyone who has just arrived here. And how many more would arrive here if there was free money available (more than there already is from welfare)?

I'm not sure of my ground here, but I think those who know the subject say the cost of paying everyone a flat rate of something like £1000 a month instead of administering our current fiendishly complex benefits system and handing free money only to those who qualify, would be approx the same as the current benefits bill.

If there were an overarching principle that the new system would cost no more than the old welfare system, i.e. it was revenue-neutral and cost-neutral, then I guess it might be acceptable.

Even so, I'd rather people had to do something for it, like community service or "voluntary" work. I think Bill Clinton had that idea, calling it "Workfare". Paying people for nothing does not sit well with me.

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Re: Furlough scheme and moral hazard

#330384

Postby scotview » August 2nd, 2020, 6:05 pm

Thanks for the discussion so far.

Just to be clear, if universal income were to be implemented would, for example, housing benefit, tax credits, car motability schemes, fuel poverty allowance , free childcare, free school meals, free dental work, free prescription specs etc, etc actually be stopped ?

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Re: Furlough scheme and moral hazard

#330386

Postby Lootman » August 2nd, 2020, 6:17 pm

scotview wrote:Thanks for the discussion so far.

Just to be clear, if universal income were to be implemented would, for example, housing benefit, tax credits, car motability schemes, fuel poverty allowance , free childcare, free school meals, free dental work, free prescription specs etc, etc actually be stopped ?

Also disability benefits, presumably.

Every benefit would go except for the state pension, which isn't really a benefit in the same sense.

I'd also assume that it would not be means-tested, so that everyone gets it, else it would not be "universal". But it would be taxed.

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Re: Furlough scheme and moral hazard

#330407

Postby Snorvey » August 2nd, 2020, 7:10 pm

Not to mention all allowances and reliefs.

A lot of government employees who are tasked with administering this crap would lose their jobs (sad face). It's probably many many times cheaper to pay them a UBI than their current package.

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Re: Furlough scheme and moral hazard

#330423

Postby mc2fool » August 2nd, 2020, 8:25 pm

NeilW wrote:
Mike4 wrote:the cost of paying everyone a flat rate of something like £1000 a month

Yeah, it is a silly idea, and it doesn't cost in. You'd require massive tax hikes...

But a few days ago you posted in a thread on the impact of covid19 on taxation that:

NeilW wrote:Of course there is no need for any extra taxes at all. It all pays for itself over time as a natural consequence of the way the system works.

Explaining in your referenced blog that:

NeilW wrote:You receive some furlough pay, which is taxed, you spend that money at a shop, which is taxed, they pay their staff which is taxed, who spend that money at a shop, which is taxed and so on.

Imagine a stone skipping across a pond where every bounce is a transaction and every ripple is taxation.

If you expand that sequence you'll find that eventually the initial injection of money (G) for the furlough pay disappears in taxation (T).

So, how does that apply and it all pays for itself for the govt giving people up to £2,500pm for doing nothing (furlough) but not apply and require massive tax hikes for the govt giving people up to £1,000pm for doing nothing (UBI)? :?

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Re: Furlough scheme and moral hazard

#330426

Postby Snorvey » August 2nd, 2020, 8:47 pm

Comedian Kevin Bridges said petty much the same thing. Give the poor more money rather than cut benefits. Youll soon get it all back again because theyll actually spend the money on, well, stuff - keeping shops, pubs, cafes And all the rest all going. Rich folk just hoard it and fire it into pensions and the like.

UBI came up in the past few years because of the rise of automation and more recently because of the damage C19 is doing to our economy.

......If there are no jobs, where exactly is the moral hazard here?

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Re: Furlough scheme and moral hazard

#330467

Postby NeilW » August 3rd, 2020, 8:07 am

mc2fool wrote:So, how does that apply and it all pays for itself for the govt giving people up to £2,500pm for doing nothing (furlough) but not apply and require massive tax hikes for the govt giving people up to £1,000pm for doing nothing (UBI)? :?


The two are not directly comparable as they are at different points in the cycle. The reason there is no taxation required for Covid 19 is that the furlough pay has already been issued and spent into the economy - which was a limited injection mechanism that offset a collapse in the other direction. What you see as a deficit is just people saving. And when they dissave, which they will do at asynchronous times as they won't all be retiring at the same time, the existing taxation percentages will drive the extra injection to nothing. We likely have the real capacity to cope with that. It's a slow burn over time.

Giving £1000 to 67 million people every month causes a major synchronous spending event we don't have the physical production capacity to cope with. You would get price auctions everywhere as people battled to use the money on what is a reduced production platform. The result is price rises. Essentially there wouldn't be enough saving in the economy to act like taxation (we're not Japanese), so you need extra taxation of some kind to stop it. Since our current mechanism is to make people unemployed to stop them spending and you're bypassing that there are no existing brakes in our current system design

All of this is analysing the flow over time and the dynamics of the interactions as flows become stocks and stocks become flows. Just like with Covid you want to avoid a peak and flatten the curve.


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